Yesterday, I spoke of the importance of educating oneself perpetually but particularly taking an opportunity to do so when it is a bit slower. During our morning conference call, I made reference to the fact that I took quite some time to learn about the rare earth sector in the last couple of days. I am thrilled to no end that I did because the basis of my trading income yesterday came from trading ‘rare earth’ stocks. In any case, I’ve made reference in this space to the ‘rare earth’ sector many times, but needed a primer for myself as to exactly what the ‘rare earths’ are as I for one wanted to know more about it which is why I took the time to learn a lot more in detail. The most common rare earth metals are yttrium, neodymium, cerium, and lanthanum. As it turns out, many of these metals are actually more common in the Earth’s crust than silver or lead! So why exactly are they referred to as the “rare earth” metals? Getting all scientific, the answer stems from the fact that these metals come from uncommon oxide-type minerals (aka ‘earths’) from which they were originally extracted. However, the discovered minable concentrations to-date tend to be far rarer than most other ores found in the Earth’s continental crust. Rare earth materials are used in such things such as ceramics, glasses, nuclear applications, optical fibers, and lasers. About 2/3 of the rare earth’s end uses are found in automotive catalytic converters, petroleum refining catalysts, and as metallurgical additives and alloys used in such things as smartphones. As it turns out, the Mountain Pass mine in the Mojave Desert is a place where rare earth metals have been mine yet the U.S. amazingly has been but a bit player in the mining of any rare earth metals for over 25 years! The biggest producer is China which accounts for more than 90% of world supplies. Well, the whole sector has exhibited breathtaking gains in recent months with stocks like Molycorp (MCP) and Rare Element Resources (REE) quadrupling in the last few months. Demand is certainly a factor as there has been an increased desire for usage of these minerals along of course with a rise in the value of other metals as well. But the main factor has been China. As they are the main producer, they have a lot of control and officially cut export quotas yesterday by 11% in the 1st round of permits for 2011 which can extend a global shortage of the rare earth minerals. The Chinese government slashed export quotas by a staggering 72% in the second half of this year. The Chinese Ministry of Commerce noted also that this latest cut may not reflect what will happen all year and that it’d raise the export taxes for many rare earth elements as well. The other thing that moves many of these stocks is announcements of deals as well as timetables for the manufacture of said metals. MCP is the only rare earth oxide producer in the Western Hemisphere. For perspective, their revenues last quarter were $8.4 million with a $4 billion market cap. They have deals in place with the likes of Hitachi Metals to jointly manufacture rare earth alloys in the U.S….but the actual manufacturing…well who knows? On Monday, it was reported that MCP had begun mining for rare earths metals at Mountain Pass which accelerated the upward move. Then yesterday a report came out contradicting that faulty news; the stock fell almost 15% from its intra-day high! So, like so many other trading vehicles, the rare earths will remain in play for some time to come and can be great for day traders…particularly if one has a degree of understanding- not to an expert level but just a degree of understanding- as to what is moving the stocks.
Markets in Asia were strong overnight with Tokyo up 0.5% and Hong Kong up an even stronger 1.5%. Markets are also generally ahead in Europe with Frankfurt up 0.5%. Gold is flat, oil slightly lower, dollar slightly weaker, and bonds up a touch. Crude Inventories are due out at 10:30AM. All is generally quiet with no major news nor earnings overnight. Thus, the slight drift upward in stock prices on low volume is likely to continue today although volumes and movements may be a bit higher than those of the previous couple of days as people are able to get back to work and the end of the year approaches. The focus will like be on the rare earths, stocks in potential merger play (e.g. BJ), and A-B-A2’s on small caps.
Reiterating-
If the whole story is not there -
If something is good, assume either a short thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified.
If something is bad, assume either a buy thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified-
Good- The following stocks have good news and/or a strong technical pattern
SBAY- closed near a high after launching an online 3D mall
VVTV- closed near a high after it received a new ‘Buy’ rating from Piper Jaffray
NFLX- closed near a high amid reports it is talking about advertising overseas according to “Adweek”
AEN- closed near a high
AG- closed near a high
BRNC- closed near a high
SEED- closed near a high as China reportedly mulled proposed legislation on management of genetically-modified food
IM- mentioned on “Fast Money” last night
BJ- “NY Post” article reports that the stock is still in play to be bought out
Bad-The following stocks have bad news and/or a weak technical pattern
FSLR- closed near a low
MSB- closed near a low
RLD- closed near a low
XOMA- closed near a low
SODA- closed near a low
MCP- closed near a low
Earnings:
None today
Epiphany Trading, LLC
www.epiphanytrading.com
Erik R. Kolodny- Chief Markets Strategist
Brendan P. Byrne- President
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